Joe Biden released details of his first budget on Friday with $6 trillion to be spent in the next year against $4.2 trillion in revenues.
Of all the things that stand out in the budget, “only” $300 billion is new spending. The rest of the $1.5 trillion shortfall is consumed in pre-committed programs such as Medicare, Social Security and debt interest payments. It is a massive structural deficit that will only grow.
The United States is living well beyond its means. The plan itself, which you might consider wildly optimistic, lays out that US national debt will rise by $14 trillion by 2031, a 50% increase from its current position. It also projects a negative real rate of interest until 2029.
In the table below the price index is assumed to grow 2% or less per year all the way to 2031 and the 3-month Treasury yield is below that until 2030. A negative real return for short term bond holders.
In other words, they want to borrow $14 trillion (roughly 70% of US GDP) and have assumed they will pay nothing for the privilege for a decade?
Who will buy these United States Treasury Bills? Who would possibly buy something that will so manifestly be worth so much less in a decade’s time? You will! You and your pension fund will fill up on these “risk free assets”. Indeed, as you age, it is mandated in many countries that you buy this garbage.
I expect all sorts of sinister changes to investment rules in the US over the next decade to keep people “safe”. One of the victims will be Bitcoin, which will be deemed too risky for retail investors who will be corralled into hoarding their life’s work in the “safety of bonds”. It will be the right and moral thing to do.
The path the budget lays out for corporate profits versus wages is surprising too. From the point of assumed recovery in 2022, gross corporate profits rise 13% in 9 years. That is a growth rate of only 1.4% per year, significantly below the economy’s assumed growth rate.
On the other hand, employee compensation grows 43%, an annual growth rate above 4%, above that of the wider economy. That would be bucking a trend that began in 1971. Machines are eating blue collar wages; computer code is eating white collar salaries. For this massive rise in the returns to labour to happen, the productivity of labour would need to rise faster than the economic growth rate for a whole decade. I’ll be polite and say that is unlikely.
The budget document itself is a work of art and if you have time to read between the lines you should probably do so. They would have agonised over the wording for weeks, it’s a great window into the direction America is taking.
It is also littered with Soviet style language that could perhaps have been better expressed, for example;
“Paid leave has been shown to keep mothers in the workforce, increasing labor force participation and boosting economic growth.”
On the issue of government financing, an excellent podcast emerged this week from the Magellan Investment Group. CIO Hamish Douglass interviews Kevin Warsh, a former member of the Federal Reserve Board.
On expressing the difficulty in assessing the risks to the global economy Douglass asks how the risk should be assessed. Warsh then makes a very good case for Bitcoin (unintentionally). He essentially expresses our long-held view that governments no longer care about debt and deficits and they are perfectly willing to print as much money as they require and only scarce assets will do.
So far, so what? Just tune in to the 40 minute mark of the podcast and listen in for 2 minutes. It’s absolutely visceral. It appears as though this section was edited in after the fact, because once Douglass is finished ranting it re-joins rather awkwardly. Some highlights from the outburst.
- They are all going to zero
- Crypto gold…..there is no gold
- I’m going to write a piece about this
- In the long term they are illusions
- They are nothing
- Tulip-Mania (yes the term is back)
- It will turn to pumpkins and mice
The thing is there will be sufficient loss, bankruptcy and destruction across this sector in the next ten years for Douglass to ultimately claim he is correct, which he will. We saw this with the internet, but ultimately dominant players emerged even though 90% of projects went bankrupt. Those dominant players in a new industry make up most of his investments today and they didn’t even exist 20 years ago.
I found his outburst revealed a complete lack of homework on how this technology works, mostly because he was unable to distinguish between projects that are clearly frauds, of which there are many, and those that are validly outperforming him by orders of magnitude.
We have to be open to criticism and consider the arguments and the risks. As always, the best criticisms are from people that understand something about what is going on. Looking forward to his “piece” when he writes it, he might learn something from doing so, and if he takes the time to do it properly, so might we.
Energy use in context
A nice graphic following up last week’s energy discussion. In context the energy footprint of Bitcoin is absolutely minimal, particularly when you consider how it is pushing the boundaries of capturing wasted and renewable energy sources, it will likely end up a net positive.
The most telling point of the chart is the extent of the loss in energy produced. The drive needs to be for greater efficiency and the Bitcoin network can be a large part of that.
Even so, the energy use needs to be justified and efficient and for our part we will do more to explain and track progress on these metrics.
The Reserve Bank confirmed its no change policy for interest rates and bond buying this week.
Of most interest were the comments on wages:
“There are reports of labour shortages in some parts of the economy. Yet while business complains about the international border closure causing skills shortages, the RBA is seeing no firm evidence so far that this is showing up in wages pressure.”
I can put forward several reasons why:
- The skill shortage is mostly in tech. If you compromise you can still find the people overseas, but it is harder to get the best outcome. For example, 1 year developers in Sydney are now asking for $120,000+ when they can be sourced overseas for $40,000 or less. You might get lucky and you might not, but it is worth the risk.
- There is an entire (and large) cohort who are not doing well on the wages front. Particularly traditional financial services like banking. It got a lot harder post Royal Commission, and many of these people are leaving and not being replaced.
- The bigger trend of tech simply means fewer people are needed. The demand for labour outside of computing skills is falling because machines are undertaking many of the roles.
I think that final point is critical, because despite all the loose monetary policy of the last 12 years, the wage growth (even nominal wage growth) in the US, Europe and here in Australia hasn’t happened. The policies are simply masking the downward trend.
Meanwhile, house prices in Australia in May rose at 2.2%. Their monthly rate of growth exceeds the annual rate of growth in wages. The policy is designed to help people by lifting their wages, but whats the point if the things they can buy with them move into the distance at a faster rate?
As always, there aren’t many other options for the RBA. The debt burden on households is enormous. It’s going to be low interest rates, QE and wait until there is a better story to tell on wages.
Sounds wonderful. Soon my European brothers and sisters will be able to register to go to the pub with their handy new EuroApp. Sign in now and receive a free baguette or frankfurter.
“The new digital ID will give every European the keys to their digital twin,” Thierry Breton, EU commissioner in charge of digital policy said
Increasingly, people are aware that what goes online, goes online forever. Whatever is hackable, will be hacked. It doesn’t really matter what your protocols are, how many back-ups you have and how many passwords. It will fail. The more complex the security protocol, the more likely to fail. The more people and consultants who are involved “securing” things, the worse it becomes. That is why everyone’s data leaks, particularly via government and local government. The trick is not to centralise massive amounts of data. Don’t collect it and throw it all in one pot because it becomes so valuable it will be compromised.
Every major business, every major government has been hacked. Who knows how many hacks have happened that we don’t hear about? Rest assured though, your data is already out there.
In the U.K., for top secret matters, MI5 & MI6 went back to the pen and paper filing system after the WikiLeaks incident and have done so ever since. It is orders of magnitude harder to compromise such data. It’s cheap and it works.
Unfortunately, what is true for their secrets is not applied to ours.